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Mitt Romney and Bain & Company FDIC Bailout


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  1. 1. Bailout for Bain

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Mitt Romney and Bain & Company

A bail-out for Romney?

Aug 31st 2012, 17:57 by R.L.G. | NEW YORK

DID Mitt Romney extort the Federal Deposit Insurance Corporation into taking a $10m loss in a bail-out of Bain & Company, the consulting firm he once worked for?

That's the case that Tim Dickinson makes in a Rolling Stone article that should give the Romney campaign jitters. Bain & Company is a consulting firm, which in the 1980s spun off a private-equity firm, the similarly named Bain Capital. Mitt Romney became the head of the new private-equity company. Many of the founders of the original consulting firm (including Bill Bain, pictured with Mitt) cashed out some of their stock in Bain & Company to put it into Bain Capital. But a series of unlucky shocks (a scandal, and the 1989 recession) put the original Bain & Company (cash-poorer, since its stock had been depleted) on the financial ropes. Mr Romney was called in to revive the consulting firm.

Which he did in successful fashion, according to the story known publicly so far. But Mr Dickinson, through a Freedom of Information Act request, got documents showing how Mr Romney forced Bain & Company's creditors to accept painful "haircuts" on their loans to the consulting firm. The federal government was involved, because one creditor bank had been taken over by the FDIC, an arm of the federal government that assures depositors aren't devastated when banks go bust.

Somehow, a strange clause had been inserted into the banks' agreements with Bain & Company:

"Bain had inserted a poison pill in its loan agreement with the banks: Instead of being required to use its cash to pay back the firm's creditors, the money could be pocketed by Bain executives in the form of fat bonuses—starting with VPs making $200,000 and up. "The company can deplete its cash balances by making officer-bonus payments," the FDIC lamented, "and still be in compliance with the loan documents."What's more, the bonus loophole gave Romney a perverse form of leverage: If the banks and the FDIC didn't give in to his demands and forgive much of Bain's debts, Romney would raid the firm's coffers, pushing it into the very bankruptcy that the loan agreement had been intended to avert."

According to the article, the FDIC-run bank was due $30.6m from Bain & Co. If the consulting firm went into bankruptcy, the bank could expect as little as $3m, since consulting firms have few tangible assets (office equipment and the like) to sell in a bankruptcy. Because Bain & Company's odd agreements with the bank would allow the firm to pay out bonuses before creditors could grab its assets, the Bain people (led by Mr Romney) were holding all the cards. Indeed, Mr Romney made good on his threat: senior executives at Bain & Company did start getting big bonuses as the negotiations were ongoing in the early 1990s. In the end, says Mr Dickinson, "The FDIC agreed to accept nearly $5 million in cash to retire $15 million in Bain's debt—an immediate government bailout of $10 million."

At the heart of this story is a strange fact: that banks lent Bain & Company money with a provision that would allow Bain's top people to raid the cash-kitty before any liquidation forced by bankruptcy. But the FDIC document (see image) seems to confirm that this is the case. bain2_foia.jpg

If the story is not fatally undercut by subsequent reporting or the Romney campaign's explanations, it should harm the Romney campaign. The fact that the taxpayer was not directly on the hook (the FDIC is funded by member banks) softens the story's sting—and probably makes the word "bailout" a stretch. But the FDIC's job is shoring up banks, not consulting firms. Mr Romney thought that Detroit carmakers should be allowed to go bust rather than getting federal help. Paul Ryan said this week "We will not spend four years blaming others; we will take responsibility." The tea-party movement began in 2009 when Rick Santelli, a financial reporter, decried "losers" getting money from hard-working Americans because those losers had overextended themselves on their home purchases. If Bain & Company was just such a "loser" with too big an appetite, and got a handout to keep its loans above water, Mr Romney has some awkward explaining to do. And "it was perfectly legal" will not do the trick. "Legal but stomach-turning" is all too common in American finance these days. Mitt Romney can ill afford to be more closely associated with dealings like that.

Update: The Romney campaign has responded to say that

Mitt Romney rescued Bain and Co without a single taxpayer dollar, by bringing everyone - the founders and the creditors - together to take tough steps to save the firm.

A campaign source notes that Mr Romney had nothing to do with writing the original loan covenants that allowed paying staff before creditors. Mr Romney was at Bain Capital when the agreements were made, before he returned to Bain & Company.

It's also worth noting that Bain & Company remains a prestigious and successful consulting firm to this day. In other words, running into a cash crunch didn't necessarily make Bain a "loser". This leaves the political question of how to distinguish (beforehand, with imperfect knowledge) a loser from a troubled entity worth saving. Had Bain & Company gone into bankruptcy, it's unclear whether it would have re-emerged. Mr Romney's hard bargaining kept Bain from having to face that question. And perhaps only time will tell whether the Making Home Affordable programme or the GM bail-out were more like the Bain example (keeping worthy but troubled borrowers alive), or were cases of temporarily resuscitating terminal cases that should better have been left to the bankruptcy system.

Entire Story

Rolling Stones

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told ya romney is a smart guy

i remember the fake documents put out about george bush too .. dan rather was fired for false reporting .. .. oh but cbs is so repectful .. they wouldnt lie ..

im going to not listen to anything bad about romney any more .. ive made my choice long ago .. any one but obama its all over but the crying

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Although it was a bailout, the FDIC does not get it's money from tax payers. So the tax payers were not technically on the line.

This information basically shows Romney as a shrew business man. That's perfectly fine, the question is: is that what this country needs? Who will fall on the short side and who will fall on the beneficial side?

Edited by simple
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Bain ‘Bailout’ Baloney Link

A union president claimed that Romney “asked for a government bailout” for his troubled company. That’s not what happened.

First of all, it wasn’t Romney’s company that was troubled; it was the consulting firm he had left — Bain & Co. — in order to form Bain Capital. And while Romney did negotiate a favorable debt settlement with banking regulators for Bain & Co’s partners, they did not receive taxpayer dollars.

Mary Kay Henry, international president of the Service Employees International Union, made the claim.

Henry: We just learned that when his company found itself in trouble, Mitt Romney asked for a government bailout.

Our fact-checking colleagues at the Washington Post and ABC News vetted similar claims made by Democrats.

Based on their reporting, here’s what happened:

Romney had left Bain & Co. in 1984 to form the spin-off private equity firm Bain Capital. But Romney came back in the early 1990s when Bain & Co. was on the brink of bankruptcy. The company’s founders — Romney wasn’t one of them — had taken $200 million of borrowed money out of the firm for themselves, which led to the firm’s financial problems.

The company owed $38 million to a failed bank, which had been taken over by the Federal Deposit Insurance Corporation, an independent federal agency that insures bank deposits. Romney negotiated with the FDIC a reduction of $10 million in debt, and the FDIC forgave $4 million in interest.

The agreement didn’t amount to a loss for taxpayers. The FDIC is funded by bank insurance premiums and treasury security investments — not congressional appropriations.

In fact, as the Post points out, these kinds of agreements are typical and recover more of the outstanding loan. The FDIC’s own handbook said that restructuring a loan is more productive than spending money on litigation to recover the money.

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